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Talking Points:

- The European Central Bank finally rolled-out initial details on their plans for stimulus exit, but given the context with which this was done, one must wonder why even embark on stimulus exit at all? The ECB is planning to reduce asset purchases by 15 Billion Euros/month from September-December of this year, at which point asset purchases will stop. The bank went on to say that they’re expecting rates to stay at current levels ‘at least through the summer of 2019,’ dousing hopes for a rate hike in the first half of next year. But, puzzlingly, Mario Draghi said that the economy needs even more stimulus during the press conference, while pledging that the Governing Council remains on standby to do more if needed.

- EUR/USD is trading below a big zone of longer-term support/resistance, and given the backdrop with which this move has happened, that theme may have continuation potential. One of the more bullish factors behind the Euro’s run over the past year was the prospect of stimulus exit followed by higher rates. Now that the ECB has delivered that announcement of stimulus exit, while also dousing the prospect of higher rates in the near-term, that bullish driver may no longer exist, and that could keep the single currency on offer down to lower levels such as 1.1500 or perhaps even 1.1200. The Fed is forecasting five rate hikes to the end of next year, and given this morning’s ECB statement, we might see one from the ECB in that span of time. This divergence could remain as a driver in the pair.

ECB Announces Stimulus Taper – Euro Sells-Off

The European Central Bank did today what many had been waiting for since last year, as the ECB announced details behind the banks plan for stimulus exit. The current program is set to expire in September and that runs at 30 Billion Euros per month. After September, bond buying will drop to 15 Billion per month going into the end of 2018, at which point Asset Purchases will stop. This initial announcement got Euro bulls excited, and the currency moved up to a fresh June high shortly after the release. But that strength could not hold, and another item within this morning’s statement seemed to catch market participants by surprise, and that was the fact that the ECB said that they anticipate rates staying at current levels “at least through summer of 2019 and in any case for as long as necessary to ensure that the evolution of inflation remains aligned with the current expectations of a sustained adjustment path.”

This is quite a bit more dovish than what markets were expecting. Earlier this morning rates markets were looking at a greater than 70% chance of a hike from the ECB in June of next year. After this morning’s ECB release, those odds moved below 6%. After that quick spike of initial Euro strength, the currency came right back-down in the minutes after the release, driven in-part by a far more dovish outlay than what one might expect when the ECB actually announced stimulus taper.

EUR/USD Daily Chart: Euro Bears Take-Control, Working on Bearish Engulf Through Support

Longer-Term EUR/USD

The Euro caught a bid in April of last year after the first round of French elections resolved in a rather market-friendly way, and that theme lasted for much of the year and into the first four months of 2018. At the ECB rate decision in April, the currency began to break-lower as a recent down-draft in European economic data opened the door for an even more dovish Mario Draghi. But that theme of Euro weakness hastened in May as a fresh bout of political risk began to show in Italy, and potentially Spain, as well. This helped to drive EUR/USD all the way down towards the 1.1500 level after having been around 1.2500 just a couple of months earlier.

But at the core of that bullish drive last year was the idea that the ECB would start to look at tighter policy as political risk began to abate. This would entail first a taper of stimulus, followed then by higher rates and tighter policy. That was rebuked in September of last year when the ECB extended their stimulus program into 2018, and prices finally tested below that zone of support that runs from 1.1685-1.1736. But just a couple of weeks later, a red-hot German GDP report brought bulls back into the fray, and buyers pushed prices right back-above as markets began to, again, price-in higher rates and tighter policy from the ECB.

Today finally delivered on that hope. But – the European Central Bank was likely quite a bit more dovish than what many were looking for on an announcement of stimulus exit. During the press conference, Mario Draghi said that ‘significant monetary policy stimulus is still needed to support the further build-up of domestic price pressures and headline inflation developments over the medium term.’ He also went on to say that ‘The Governing Council stands ready to adjust all of its instruments as appropriate to ensure that inflation continues to move towards the Governing Council’s inflation aim in a sustained manner.’

To recap: The ECB announced stimulus taper today, but the bank also thinks that the economy needs even more stimulus, and they’re standing by to do more and they also don’t think rates could be adjusted by even 25 basis points for over a year. Which begs the question – why even announce stimulus taper at all? This also opens the door to what could become a consistent string of Euro losses. At the Fed’s rate hike yesterday, the FOMC forecasted another five hikes by the end of next year (two more in 2018, three in 2019). This would be quite the case of divergence between the world’s two largest Central Banks, and now that the ECB has spoken, and clearly said that they are anticipating rates staying at current levels until ‘at least’ through the summer of 2019, there’s no more under-the-surface hope of a more-hawkish move from the European Central Bank.

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